Microfinance, not misery

Pointed questions have been asked from the proponents of microfinance ever since the founder of Grameen Bank, Dr Muhammad Yunus, received the Noble Peace Prize. The cynicism and backlash has matched the enthusiasm and fervour stride for stride.

The problem with such debates in the public policy and development discourse is that they are seldom informed by meaningful scientific evidence. Anecdotes or communal ethnographies are limited in the type of information they can provide. When the questions of impact or causality are involved, research methodology and statistical precision becomes important. For instance, the impact may contain statistical bias if only those markets are studied where the supply of credit or borrowing incidence is high.

Since microfinance is a global industry where governments and donors alike invest billions of dollars, it merits an appropriate impact evaluation that covers a wide range of contexts and different borrower types. Some rigorous field experiments conducted between 2003 and 2012 in Bosnia, Mongolia, Morocco, India, Mexico and Ethiopia show that there is a benefit to borrowers (Six Randomized Evaluations of Microcredit: Introduction and Further Steps by Banerjee et al, 2015).

While this benefit may not be overwhelmingly transformative in the sense where microfinance can be deemed as a viable alternative to cash transfer programmes, it does offer self-reliance, opportunity and freedom of choice – contrary to what many detractors argue. If the promise of microfinance proponents was to encourage small-scale entrepreneurship and offer an avenue to potential aspirants, then it has delivered. Evidence from these six countries shows that access to credit increased business activity and positive effects have been witnessed on business assets and investment.

Microfinance is not a panacea for all the problems in a developing country. It is one of the public policy levers that development practitioners and governments have at its disposal. It will be incorrect to say that it holds the promise of a silver bullet in alleviating mass poverty. However, categorising it an exploitative mechanism to pull the poor into debt and a poverty trap is unfair and comes across as an empty rhetoric. The aforementioned studies have disavowed this notion.

The need to scientifically measure the positive as well as negative impacts of microfinance cannot be stressed enough. While it may be true that a majority of Indian farmers who committed suicides were borrowers of microfinance institutions, the effect of other extenuating factors such as the fall in global food prices and the lack of government support cannot be overlooked before establishing causality. The idea that microcredit leads to servitude seems farfetched and reeks of a neo-liberal façade.

Microfinance, paradoxically, has also been a method through which the poor save. The poor save incrementally in small amounts. However, they also face other problems which make it difficult for them to finance lumpy expenditures on durables like a television or a refrigerator. Microfinance institutions offer them a better alternative through lower interest rates and the adherence to a social mission. Moreover, Due Diligence, a book by David Roodman that is often cited in support of dismissing microfinance does acknowledge the positive impact of the micro savings products on poverty.

Finally, experimentation with loan features, such as tweaking of disbursements and repayment schedules, has also had a positive impact in some cases. In India, a delay in the repayment of the first loan instalment led to an increase in the short-run and long-run income of enterprises.

In Mali, an effort was made to match the microcredit cash flows to the agricultural cycle (repayment at harvest and not immediately after loan disbursal) led to the increase in farm investment and revenues.

The writer is the head ofresearch at the Pakistan Microfinance Network.

Email: aakbar@pmn.org.pk